David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Media Five Co. (FKSE:3824) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Media Five
What Is Media Five's Net Debt?
As you can see below, at the end of August 2020, Media Five had JP¥215.0m of debt, up from none a year ago. Click the image for more detail. But it also has JP¥432.0m in cash to offset that, meaning it has JP¥217.0m net cash.
How Strong Is Media Five's Balance Sheet?
According to the last reported balance sheet, Media Five had liabilities of JP¥378.0m due within 12 months, and liabilities of JP¥1.00m due beyond 12 months. Offsetting this, it had JP¥432.0m in cash and JP¥188.0m in receivables that were due within 12 months. So it actually has JP¥241.0m more liquid assets than total liabilities.
This luscious liquidity implies that Media Five's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Media Five boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Media Five will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Media Five wasn't profitable at an EBIT level, but managed to grow its revenue by 7.2%, to JP¥1.5b. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Media Five?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Media Five lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through JP¥65m of cash and made a loss of JP¥78m. Given it only has net cash of JP¥217.0m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Media Five that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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About FKSE:3824
Adequate balance sheet and slightly overvalued.
